Cost Management explained in 4 steps

Cost management focuses on finding the right project and carrying it out correctly. It includes activities like planning, estimating, budgeting, financing, funding, managing, controlling, and benchmarking costs to ensure timely project completion within the approved budget and enhance project performance over time.

Cost management covers the entire project life cycle, from initial planning to measuring actual cost performance and project completion. This article explains the different steps and processes in Project Cost Management, following methods like AACE International’s Total Cost Management Framework.

Step 1: Resource planning

Resource planning is the process of ascertaining future resource requirements for an organization or a scope of work. This involves evaluating and planning how to use the physical, human, financial, and informational resources required to complete work activities and their tasks.

Most activities involve using people to perform work. Some activities involve materials and consumables. Other tasks involve creating an asset using mainly information inputs (e.g., engineering or software design). Usually, people use tools such as equipment to help them. In some cases, automated tools may perform the work with little or no human effort.

Resource planning starts during the scope and execution plan development process. Here, various structures like the work breakdown structure (WBS), organizational breakdown structure (OBS), work packages, and execution strategy are developed. The OBS categorizes labor resources or responsibilities, facilitating resource planning since all resources fall under someone’s responsibility as outlined in the OBS.

Resource estimating, often included in cost estimating, identifies the required quantities of resources for each activity, such as hours, tools, and materials. Schedule planning and development determine the sequence of work activities, followed by resource planning. Resource planning involves evaluating estimated resource quantities, assessing availability and limitations, and optimizing resource usage over time, all while considering project circumstances. This optimization occurs iteratively through the duration estimating and resource allocation steps within the schedule planning and development process.

Step 2: Cost estimating

Cost estimating is the predictive process used to quantify, cost, and price the resources required by the scope of an investment option, activity, or project. It involves applying techniques that convert quantified technical and programmatic information about an asset or project into finance and resource information. Estimating outputs primarily serve as inputs for business planning, cost analysis, and decision-making. They also inform decision-making and project cost and schedule control processes

Project teams generally apply the cost estimating process during each phase of the asset or project life cycle while defining, modifying, and refining the scope. As the level of scope definition increases, the estimating methods used become more definitive and produce estimates with increasingly narrow probabilistic cost distributions.

Dedicated software systems like Cleopatra Enterprise cost estimating and project cost databases like CESK support various types of estimates throughout the asset or project life cycle.

The estimation of activity time durations must be considered concurrently with costs, as changes in resource requirements identified during cost estimating may directly impact the schedule. Iterative approaches are used because outcomes of a cost estimate often lead to changes in scope or plans. In fact, we can view the estimating process as part of the scope definition process because iterative trading off between cost and scope intertwines the processes.

With Cleopatra Cost Estimating, you can achieve:

• Creation of all kinds of cost estimates, from factor to detailed estimate.
• Successful tendering as it allows you to estimate costs, request bids, analyze those bids and to keep track of its costs.
• Connected cost estimating and cost control. Using the Cost Control Module, you can track project costs during the execution phase. Cleopatra Enterprise directly links your project controls document to your estimate, minimizing data handling, increasing efficiency, and reducing errors.
• Traditionally, management would ask to deliver an estimate based on the time remaining to the TA execution. However, more organizations now require estimators to follow a staged approach to estimating. It involves delivering three different types of estimates during the preparation phase.

Step 3: Cost budgeting

Within estimating, budgeting allocates the estimated cost of resources to cost accounts, which serve as benchmarks for measuring and assessing cost performance. This forms the baseline for cost control. Cost accounts used from the chart of accounts must also support the cost accounting process. Budgets are often time-phased in accordance with the schedule or to address budget and cash flow constraints.

Step 4: Cost control

Cost control involves measuring variances from the cost baseline and implementing corrective actions to minimize costs. Procedures are applied to monitor expenditures and performance against the progress of a project.

Recording all changes to the cost baseline is crucial, along with continuously forecasting expected final costs. Furthermore, when actual cost information becomes available, an essential aspect of cost control is explaining the cause of the variance from the cost baseline. Thus, this analysis informs necessary corrective actions to prevent cost overruns.

The figure below illustrates a process map for project performance measurement. Project teams should run this process in a continuous improvement cycle until project completion:

The process for performance assessment starts with planning and having the right tools in place. Dedicated cost control software tools can add value by defining cost control procedures, tracking and approving changes, and conducting analysis. Additionally, cost control software enhances and simplifies reporting, making it easier to inform all project stakeholders.

Cleopatra Cost Control helps you achieve:

• Project cost control and always tracing back cost components to its original budget.
• Scope change management. Estimate costs and add it to your project controls document.
• Project completed? The feedback process will be in place. Send the actuals to your cost models to increase their accuracy and quality for future estimating. While most tools limit themselves to being cost estimating software or a cost control tool, Cleopatra Enterprise is both.

Bonus Step: Benchmarking

As a bonus step, it is wise to add benchmarking to the project cost management process.

Benchmarking plays a crucial role in closing the loop between project A and project B. It involves analyzing the knowledge gained from project A (referring to the running and executed projects) and applying the feedback to project B (the next projects). This creates an improvement cycle aimed at increasing project performance.

Benchmarking is a widely adopted practice in technical industries to enhance project performance. Software systems like Cleopatra project benchmarking aid estimators and project controllers. They assist in addressing the complex question: How to use project big data to execute projects within time and budget?

Project benchmarking aims to store data from executed and ongoing projects. It extracts valuable project metrics and benchmarking them with current estimates. Furthermore, performing statistical analysis on historical data provides valuable insights into the relationships between variables. These insights can be used to establish a reliable cost knowledge base or to calibrate existing ones.

Project benchmarking includes not only comparing projects but also comparing revisions within a project.

What you can achieve with Cleopatra benchmarking:

• Collect historical project data that can provide valuable insights and project comparison to make critical business decisions.
• Benchmark your estimates against your previous projects and improve your cost estimate significantly.
• Extract metrics across projects to enhance future cost estimating accuracy.
• Develop meaningful and interactive reports.
• Export & Import data easily from Excel.